It’s hard to say if a speculative market will ever emerge for bitcoin. One of the options is some disaffected billionaire putting up a deep pool of BTC to allow for large bets in digital currency.
I was talking to a hedge fund manager I know here in London
about setting up a UK based bitcoin exchange. To this end, I
contacted a hedge fund servicing company (prime broker) with a
large bitcoin position to get a quote on borrowing 10,000 bitcoins.
The price they came back with; 250% interest on the bitcoin loan.
Needless to say, the economics don’t support this. But it got me
thinking. Until potential market-makers can access borrowed
bitcoins at reasonable interest rates we won’t see any exchanges
operating that can handle ‘market’ orders for 1,000 BTC to buy or
sell ‘at the market.’
And with this we won’t have an institutional or speculative market. And without this we won’t see bitcoin gaining any measurable market share at the expense of the government-sponsored clown currencies like the US dollar, euro, pound, yen or renminbi [yuan]. So goes the speculator’s case. What about the non-speculating users of bitcoin?
The chicken and egg problem has already been solved on the mining side of the bitcoin business model. At first it wasn’t clear why anybody would waste time and energy mining for bitcoins if you couldn’t spend them - then merchants started accepting bitcoin and a ‘virtuous circle’ was created: miners were incentivized to keep mining and more merchants were incentivized to grab more of these mined bitcoins.
In other words, there is a ‘barter value’ for bitcoin set informally by tracking news about what people are willing to accept bitcoin for in dollar and other currency terms. And this is great and is enough to do everything bitcoin lovers want bitcoin to do: taking the management of currency away from the corrupt central bankers and their affiliates.
Maybe a speculative market will never emerge for bitcoins. I’m curious to see how a startup ‘coinsetter’ will tackle these ‘market making’ issues. But so far, we have not yet seen anyone step up and put serious capital to work backing enough bitcoin loans to allow for guaranteed ‘market orders’ of bitcoin in size. One thing I’m pretty sure about though, is that the model of ‘bitcoin exchanges’ as they are currently iterated seems vulnerable to either state or DDoS attack and with no ‘market making’ ability (tied to an institutional market with deep pockets) it’s hard to see this business of the bitcoin ecosystem expanding.
But then again, maybe some disaffected billionaire type will step in and rattle some cages by putting up a deep pool of BTC to allow for large speculative bets in bitcoin. If the goal is to challenge the fiat cartel this is a necessity, IMO.
With or without a $100 billion market-maker, bitcoin will still continue to encroach on the ‘free lunch’ of the status quo of the current banking system who milk us with their rent seeking nickel and diming of every transaction made anywhere, anytime.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.